Intrinsic value is the estimated true value of an asset based on its fundamental characteristics. It represents what an investment is actually worth, regardless of its current market price. Investors use intrinsic value to determine whether an asset is undervalued or overvalued.
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Intrinsic value focuses on underlying fundamentals rather than market sentiment.
For stocks, intrinsic value is often calculated by analyzing expected future cash flows, earnings potential, growth prospects, and financial stability. These future cash flows are typically discounted back to their present value to reflect risk and the time value of money. If the intrinsic value is higher than the current market price, the stock may be considered undervalued.
If it is lower, the stock may be seen as overvalued. However, estimating intrinsic value involves assumptions about growth and risk, which means different investors can arrive at different conclusions. Market prices can deviate from intrinsic value for extended periods due to investor psychology, economic conditions, or short term news.
Short example:
Suppose an investor calculates that a company’s future cash flows justify a value of $50 per share.
The stock is currently trading at $40.
Based on this analysis, the investor considers the stock undervalued and expects the price to move closer to $50 over time.
Disclaimer: Investing brings risks. Our analysts are not financial advisors. Always consult an advisor when making financial decisions. The information and tips provided on this website are based on our analysts' own insights and experiences. Therefore, they are for educational purposes only.